In my experience, growth and success looks different for every digital agency owner – and this usually depends on where they are on their journey in business.
For some, success might be increasing headcount, opening new offices, working less and/or earning more. While for others who might be a little further down the track, their ultimate goal might be to exit the agency.
No matter what the goal is – when it comes to growing your agency one of the best first steps you can take is to understand your agency’s value.
Over the years, I’ve helped hundreds of agency owners analyse the value of their business in preparation for the next step. My Digital Agency Coach team and I use a handful of tactics and strategies to do this, including measuring the agency’s EBIT & profitability.
This segues us nicely into the purpose of this article – how to calculate your profitability & EBIT, why it’s important to do so and 2021 digital agency benchmarks to measure up against.
EBIT simply means Earnings Before Interest & Tax. EBIT is a method that is often used to find the profit generated by a digital agency (or any company for that matter). EBIT is synonymous with Operating Profit as it doesn’t consider things like tax and interest expenses.
For obvious reasons, your EBIT isn’t indicative of exactly how much profit you’re bringing home. However, it is a great indicator of the profitability potential of the business which is why it is such a great metric when it comes to measuring the value of your agency.
EBITDA is almost the same calculation as EBIT however, it also brings Depreciation and Amortization into the equation.
EBITDA is a more complex calculation that takes time and resource to produce, so it’s usually used to prepare your agency for sale. At Digital Agency Coach, we recommend keeping an eye on your EBIT as it is a much more manageable calculation that can be produced for regular reporting.
The short answer? No, EBIT and Net Profit are two different things. Your Net Income is what’s left of your Revenue once you subtract the total costs of doing business. This ‘total cost’ includes taxes, interest, depreciation and all your other expenses and deductions
While your EBIT can be a valuable tool for agency valuation, it’s also an important metric to keep an eye on to measure the success of your ongoing efforts.
In this recent Promo Republic webinar, I share industry secrets about what the high performing agencies are doing and what makes them better than the rest.
One of the key takeaways from the webinar is that high performing, successful and growing digital agencies have their finger on the pulse when it comes to their profitability and their EBIT.
Pre-pandemic, if your EBIT was greater than 20%, you were in a good position and would have been up there with fellow successful agency owners.
However since the pandemic began, (broadly speaking) digital agencies have become more profitable and have nudged the ‘Good EBIT’ score up to around 25%.
It’s important to note that while 25% is a good EBIT score, there’s still plenty of room for improvement – some high-performing agencies are boasting an EBIT between 35-44%!
Now you understand what EBIT is and what the benchmark looks like, how can you calculate the EBIT of your agency?
There are a couple of ways to calculate EBIT, and your accountant or finance team will be able to help you do so. But, in theory, you can just follow the formula below:
EBIT = Net Income – (Interest + Taxes)
Once you have your magic number, measure it against the diagram in this article and see where your agency’s EBIT ranks among the industry benchmarks.
If there’s some work to do (and remember, there’s always room for improvement) – start by reading this quick guide to profitability on purpose and address the six key steps to maximising your profitability.
Of course, if you think you might benefit from a deeper level of support, Get In Touch with our team and chat about joining our Mastermind Groups or Coaching Programs to help you grow your digital agency and become a high performer.
I'm an ex-agency founder now coach and mentor to digital agencies and trusted by Google and Forbes to deliver agency growth programs across the globe.